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  • Expenses deductible over several years – borrowing, depreciation, capital works

    From 1 July 2017, used and second-hand depreciating assets in residential rental properties may not be deductible.

    The following expenses for your rental property may be deducted over a number of income years:

    Borrowing expenses

    You can claim a deduction for borrowing expenses associated with purchasing your property, such as loan establishment fees, title search fees, and costs of preparing and filing mortgage documents. (Interest on the loan is not a borrowing expense, and can be claimed immediately.)

    If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less.

    If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.

    What can you claim?

    You can claim all of the following as borrowing expenses:

    • stamp duty charged on the mortgage
    • loan establishment fees
    • title search fees charged by your lender
    • costs (including solicitors' fees) for preparing and filing mortgage documents
    • mortgage broker fees
    • fees for a valuation required for loan approval
    • lender's mortgage insurance, which is insurance taken out by the lender and billed to you.

    What are you unable to claim?

    You cannot claim any of the following as borrowing expenses:

    • loan balances for the property
    • stamp duty charged by your state/territory government on the transfer (purchase) of the property title
    • legal expenses including solicitors' fees for the purchase of the property (these are capital expenses)
    • stamp duty you incur when you acquire a leasehold interest in property such as an Australian Capital Territory 99-year crown lease (you may be able to claim this as a lease document expense)
    • insurance premiums where, under the policy, your loan will be paid out in the event that you die, become disabled or unemployed (this is a private expense)
    • borrowing expenses on any portion of the loan you use for private purposes (for example, money you use to invest in a super fund).

    Stamp duty and legal expenses may be included in calculating the 'cost base' of the property for capital gains tax (CGT) purposes as they are capital expenses.

    If you repay the loan early and in less than five years, you can claim a deduction for the balance of the borrowing expenses in the year of repayment.

    If you obtained the loan part way through the income year, the deduction for the first year will be apportioned according to the number of days in the year you had the loan.

    On 3 July 2010, Peter took out a 25-year loan of $300,000 to purchase a rental property. Peter's deductible borrowing expenses were:

    • $800 stamp duty on the mortgage
    • $500 loan establishment fees
    • $300 valuation fees required for loan.

    Peter also paid $1,200 stamp duty on the transfer of the property title. He cannot claim a tax deduction for this expense but it will form part of the ‘cost base’ of the property for capital gains tax (CGT) purposes when he sells the property.

    As Peter's borrowing expenses are more than $100, he must claim them over five years from the date he took out his loan for the property. He would work out the borrowing expense deduction for the first year as follows:

    2010–11 (363 days)

    Borrowing expenses multiplied by Number of relevant days in year divided by number of days in 5 years equals deduction for year

    $1,600 multiplied by 363 divided by 1,826 equals $318 deduction on his 2011 tax return

    The borrowing expense deductions for each other year would be worked out as follows:

    Borrowing expenses remaining multiplied by Number of relevant days in year divided by remaining number of days in 5 years equals deduction for year

    2011–12 (year 2 – leap year)

    $1,282 (that is, $1,600 minus $318) multiplied by 366 divided by 1,463 equals $320 deduction on his 2012 tax return

     2012–13 (year 3)

    $962 (that is, $1,282 minus $320) multiplied by 365 divided by 1,097 equals $321 on his 2013 tax return

    2013–14 (year 4)

    $641 (that is, $962 minus $321) multiplied by 365 divided by 732 equals $320 deduction on his 2014 tax return

    2014–15 (year 5)

    $321 (that is, $641 – $320) multiplied by 365 divided by 367 equals $319 deduction on his 2015 tax return

    2015–16 (year 6)

    $2 (that is, $321 minus $319) multiplied by 2 divided by 2 equals $2 deduction on his 2016 tax return

    End of example

     

     

    Duration 3m5s. A transcript of Claiming mortgage and interest expenses for your rental property is also available.

    Depreciating assets

    A depreciating asset is an asset that has a limited life expectancy (effective life) and can reasonably be expected to decline in value over the time it is used.

    For most depreciating assets, you can work out the effective life yourself, or use an effective life determined by us. Examples of depreciating assets are carpet, furniture and appliances.

    From 1 July 2017, unless you are carrying on a business of property investing or are an excluded entity you cannot claim for depreciation of second-hand plant and equipment in rental premises used for residential accommodation.

    These changes apply to second-hand plant and equipment you acquired at or after 7.30 pm (AEST) on 9 May 2017 unless you acquired them under a contract entered into before this time. Additionally, you cannot claim for plant and equipment installed on or after 1 July 2017 if you have ever used it for a private purpose

    The table below shows whether you can claim depreciation deductions under the new legislation if the property and depreciating assets were acquired in the period mentioned.

    Table 1 Depreciation deductions you can claim under the new legislation

    Date of purchase

    New assets

    Second-hand or used assets

    Property purchased for rental purposes before 7.30pm on 9 May 2017

    Yes

    Yes

    Depreciating assets in a brand new or substantially renovated rental property purchased at or after 7.30pm on 9 May 2017

    Yes

    No

    Depreciating assets in an existing rental property purchased at or after 7.30pm on 9 May 2017

    Yes

    No

    Depreciating asset purchased before 7.30pm on 9 May 2017

    Yes

    Yes

    Depreciating asset was purchased at or after 7.30pm on 9 May 2017

    Yes

    No

    In the business of property investing

    Generally, owning one or several rental properties will not be considered being in the business of rental properties.

    The receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business.

    Excluded entities

    An excluded entity is a:

    • corporate tax entity
    • superannuation plan that is not a self-managed superannuation fund
    • public unit trust
    • managed investment trust, unit trust or a partnership, all of the members of which are entities of a type listed above.

    See also:

    Depreciating assets in a rental property purchased before 9 May 2017

    If you owned a rental property, or entered into a contract to purchase your rental property before 7.30pm on 9 May 2017, you can continue to claim deductions for decline in value of the depreciating assets that were in the rental property before that date.

    It doesn’t matter whether the depreciating asset installed in the property was new or used, or whether the property was new or not.

    The decline in value of a depreciating asset starts when you first use it, or install it ready for use. This is known as the depreciating asset's start time. For example, if you purchased an asset halfway through the financial year (eg, on 1 January) - and used it only for a taxable purpose - you can claim half of the first income year's decline in value, as long as the asset has remaining effective life.

    Your deduction needs to be reduced for any personal use of the asset.

    For assets costing $300 or less, you can claim an immediate deduction for the entire cost (to the extent you use it for a rental property). You can't do this if the asset is one of a set of assets that together cost more than $300 – for example, if you buy four dining chairs each costing $250, you can't treat them as separate assets to claim an immediate deduction.

    Methods of calculating depreciation deductions

    To work out your deduction for depreciation, use either the:

    • prime cost method – this means the value of the depreciating asset decreases uniformly over its effective life, or
    • diminishing cost method – this means the decline in value each year is a constant proportion of the remaining value; so it diminishes over time.

    To save on paperwork, depreciating assets valued at less than $1,000 can be grouped in a low-value asset pool and depreciated together.

    You can work it out using the Decline in value calculator.

    See also:

    Example

    Sharon owns a residential property she has been renting out since September 2015. In March 2017, Sharon bought a second-hand fridge to replace the fridge that had broken down.

    Because Sharon bought the second-hand fridge for her rental property before 7.30pm on 9 May 2017, she can still claim depreciation deductions for any remaining life of the asset.

    End of example

    Depreciating assets in a brand new or substantially renovated rental property purchased at or after 7.30pm on 9 May 2017

    If you buy a newly built property, or buy a property that has been substantially renovated, you will be entitled to claim depreciation deductions for decline in value of the new depreciating assets if:

    • no one previously claimed any depreciation deductions on the asset, and;
      • either no one lived in the property when you acquired it, or;
      • if anyone lived in the property after it was built or renovated, you acquired it within six months (of the property being built or renovated).
       

    Substantial renovations

    Substantial renovations of a rental property are renovations in which all, or substantially all, of a building is removed or is replaced. This could include the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

    For renovations to be substantial, they must directly affect most rooms in a building. The removal and replacement of the exterior walls, the removal of some internal walls, and the replacement of the flooring and the kitchen in a house are considered collectively to amount to substantial renovations.

    Example

    Jake bought a four bedroom residential property in October 2017 with the intent of it being a rental property. Three months before selling, the previous owners had removed a wall between two bedrooms and turned the space into a large bedroom with an ensuite. They also repainted and recarpeted the room.

    Even though Jake acquired the property within six months of the renovations being completed, the renovations only impacted a part of the house, and aren't classified as being substantial renovations. In this case, Jake can't claim depreciation deductions for the decline in value of the depreciating assets in the property. However, if Jake buys any brand new depreciating assets for the property, he will be able to claim depreciation deductions for its decline in value.

    End of example

    Depreciating assets in an existing rental property purchased at or after 7.30pm on 9 May 2017

    If you purchased your rental property at or after 7.30pm on 9 May 2017, you may be impacted by the changes to legislation for depreciating assets. These changes apply from 1 July 2017.

    You can no longer claim deductions for second-hand or used depreciating assets, whether they are bought with the property or separately. You also can't claim depreciation deductions if you have used the asset for private purposes before installing it in your rental property.

    You can claim deductions for new depreciating assets.

    See also:

    Example

    At the start of 2016, Marty bought a home that he's been living in as his main place of residence. In August 2017, Marty decided to move out and rent out the property fully furnished, which included the furniture and fittings he had been using while living there.

    Since the property was made available for rent after 7.30pm on 9 May 2017, Marty is not able to claim depreciation deductions for any remaining life of the used depreciating assets.

    This is because, even though Marty owned the property before 9 May 2017, it had not been rented out and the assets are considered used at the point he commenced renting the property.

    End of example

     

    Example

    In August 2017, Donna bought a two-year old apartment and immediately rented it out. A year before Donna bought the apartment the previous owner installed new carpet and, upon purchasing the property, Donna installed new curtains and a second-hand television.

    Donna can't claim depreciation for the decline in value of the carpet and the television because they have both been previously used.

    However, she can claim depreciation deductions for the curtains because she purchased them new.

    End of example

     

    Example

    Sue bought her house in 2009. In October 2017, she listed her house for sale. While it was advertised, she moved out and then replaced the carpet. No one lived in the house while it was advertised. The house was then sold to Tim. After buying the property, Tim rented it out immediately.

    Tim can't claim depreciation deductions for decline in value of any of the depreciating assets in the property because they are all previously used. Also, he cannot claim depreciation deductions for the carpets because he did not own the asset when it was first installed ready for use.

    End of example

    Depreciating assets purchased for a rental property

    The date you purchase the depreciating assets (either separately or bought with the property) impacts whether you are entitled to claim deductions for their decline in value.

    Depreciating assets purchased brand new

    Depreciation deductions for new assets have not changed. You are still entitled to claim depreciation for new assets you purchase for your rental property. This also includes new assets installed as part of property developments or with building packages.

    See also:

    Example

    Kerrie purchases two apartments from a developer – one-off-the plan and the other four months after completion. At the time of purchasing the off-the-plan apartment, it is already rented out by the developer.

    Both of the apartments incorporate depreciating assets such as curtains and furniture prior to settlement and the transfer of title to Kerrie. The developer also provided shared areas in the apartments' complex. The shared areas have a range of new depreciating assets that are joint property of all the apartment owners.

    For off-the-plan apartment and its shared areas, Kerrie is entitled to claim deductions for decline in value of the depreciating assets.

    For the tenanted apartment and its shared areas, Kerrie is still entitled to claim deductions for decline in value of the depreciating assets (although they have been used for four months) because:

    • no one claimed any deductions for decline in value of the depreciating assets, and
    • the apartment was supplied to Kerrie within six months of being built.

    Note that Kerrie can only deduct her share of the depreciating assets installed in the shared areas of the apartment complex.

    End of example

    Depreciating assets purchased second-hand

    If you purchased a second-hand asset before 7.30pm on 9 May 2017, you can still claim depreciation deductions for the asset.

    If you buy and install a second-hand asset or install an asset you previously used for private purposes at or after 7.30pm on 9 May 2017, you can't claim depreciation deductions for the asset.

    Example

    Don purchased a second-hand clothes dryer and installed it in his residential rental property on 8 May 2017. Assuming the dryer had 5 years of remaining effective life, Don can claim deductions for its decline in value for 5 years because:

    • he installed it in his rental property before 9 May 2017; and
    • it doesn't matter whether the dryer was brand new or previously used.
    End of example

     

    Example

    Eliza bought a dishwasher in July 2015 and used it for private purposes at her main residence. In July 2017, she installs this dishwasher in her residential rental property. Eliza can't claim deductions for the dishwasher's decline in value because:

    • she installed it in her rental property after 9 May 2017; and
    • it was previously used.
    End of example

    See also:

    Capital works expenditure

    Deductions for construction expenditure (capital works deductions) on residential rental properties are generally spread over a period of 40 years.

    You can claim a deduction if construction began after:

    • 17 July 1985 and the property is used for residential accommodation or to produce income
    • 19 July 1982 and the property is not used for residential accommodation (for example, a shop), or
    • 21 August 1979, the property is used to provide short-term accommodation for travellers and it meets certain other criteria.

    A deduction may also be available for structural improvements made to parts of the property other than the building if work began after 26 February 1992. Examples include sealed driveways, fences and retaining walls.

    The deduction is at the rate of 2.5% or 4% (adjusted for part-year claims) depending on the date the capital works began. Your total capital works deductions can't exceed the construction expenditure. No deduction is available until construction is complete.

    Deductions for construction expenditure apply to capital works such as:

    • a building or an extension – for example, adding a room, garage, patio or pergola
    • alterations – such as removing or adding an internal wall
    • structural improvements – such as adding a gazebo, carport, sealed driveway, retaining wall or fence.

    You can only claim deductions for the period in which the property is rented or is available for rent.

    If you have claimed, or could have claimed, a capital works deduction for construction expenditure:

    • you can't claim the same amount as a deduction for decline in value of a depreciating asset, and
    • the amount must be excluded from the cost base of the asset.

    See also:

    Repairs on a newly-acquired rental property

    Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property are capital expenditure and may be claimed as capital works deductions.

    Replacing capital equipment

    If you have to replace something identifiable as a separate item of capital equipment (such as a complete fence or building, a stove, kitchen cupboards or a refrigerator), you may be able to claim the cost as a capital works deduction or a deduction for decline in value.

    Example

    Janet has owned and rented out a residential property since 12 January 1983. Recently she replaced the old kitchen fixtures, including the cupboards and appliances. The old cupboards had deteriorated through water damage and wear and tear.

    The kitchen cupboards are separately identifiable capital items with their own function. This means the cost of completely replacing them is a capital cost. Because of this, Janet can claim:

    • a capital works deduction for the construction cost of this work  
    • a deduction for the decline in value of the kitchen appliances.

    This is the case regardless of whether or not any of the following apply:

    • new fittings are of a similar size, design and quality as the originals:  
    • new cupboards are made from a modern equivalent of the material used in the originals
    • layout and design of the new kitchen may be substantially the same as the original.
    End of example
    Last modified: 12 Dec 2017QC 23636